Nonprofit 411: The Importance of the Fiduciary Role on an Endowment and Foundation Board – What you need to know to avoid personal liability for fiduciary negligence

Dierdre CollinsBy Dierdre Collins, Harbor Strategies Group

You are a committed supporter of your local nonprofit organization, volunteering your time at fundraisers and making monetary donations for years. And now you have been asked to contribute your business experience and expertise as a member of the nonprofit’s board. Congratulations!

But along with the profound satisfaction of knowing you will be putting your talent to work for an organization you care deeply about comes a critical responsibility: that of fiduciary for the foundation’s assets. That means you will be accountable for acting in the best interest of the foundation’s beneficiaries and are required to follow a stringent set of rules. You will be held to high standards by regulations at both the state and federal levels. Importantly, failure to fulfill your fiduciary obligations could result in personal liability for fiduciary negligence.

Recognizing the complexities of a fiduciary role and of the underlying responsibilities for fiduciaries, this article outlines what exactly is a fiduciary, the importance of an investment policy statement, guidelines for creating an investment policy, and opportunities for outsourcing certain fiduciary responsibilities to not only leverage expertise of financial professionals but also to support the board in its requirements.

What is a fiduciary?

The strict definition of fiduciary implies, above all else, stewardship. It also suggests that, when it comes to investment management, the obligation to serve the best interests of the nonprofit or charitable organization rests with those who have been entrusted as boards of directors, trustees and officers of the legal entity which holds the assets, which may be a trust or nonprofit corporation.

Determining whether an individual or an entity is a fiduciary depends on whether discretion or control is being exercised over the assets and is often a matter of function as opposed to strictly a title. Those roles, organizational titles or specific individuals who will have fiduciary responsibility, should be described in the organizational documents or investment policy.

Despite the legal ramifications of not complying with the regulations that govern fiduciary responsibilities, a 2013 survey conducted by the Association of Financial Professionals revealed that more than 40% of organizations with annual revenues under $1 billion lack a written investment policy.

The importance of an investment policy statement

At its core, the investment policy statement serves as the “rule book” or “road map” for the organization’s investment program. It identifies the key roles and responsibilities related to the management of the program’s assets. In addition, it summarizes central policy decisions and explains the rationale for those decisions. Ideally, it should convey a clear sense of what the investment program is attempting to achieve and how those objectives will be accomplished.

Issues that could be addressed by a comprehensive investment policy may include:

  • the program’s mission
  • investment risk tolerance (i.e., the ability and willingness of the trustees to bear investment risk)
  • investment objectives
  • the policy asset mix
  • investment management structure, and
  • performance evaluation
  • Legal and regulatory considerations

Without this rule book or road map, your organization’s investment program will be directionless and success difficult if not impossible to measure. Conversely, a well-structured investment policy may add stability to your organization, help protect the assets of your institution and ultimately allow your team to meet its fiduciary obligations and fulfill its mission.

Article By: Dierdre Collins, MSFS, RFC

Co-Founder of Harbor Strategies Group

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This document is for informational purposes only and is not meant to be comprehensive or replace the advice of your financial, legal, or tax professional.

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